Carillion: the high cost of low margins

As the repercussions of the Carillion collapse start to ripple through the industry, James Parker examines the likely effect on housebuilders.

It would have been nice to have started 2018 on a high note, however the liquidation of Carillion is a catastrophe not only for the firm but the wider industry.

Beyond the mayhem for the careers of the private and public sector workers within the construction and services company, there’s an estimated £2bn of lost money to sub-contractors and suppliers in Carillion’s vast supply chain. And by vast, I mean 30,000 individual firms, if the trade body Build UK’s estimate is to be believed.

While Project Bank Accounts may provide recompense on the public sector jobs, it remains to be seen whether any compensation will be forthcoming on the private sector jobs, such as Moda Living’s 34-storey build to rent project Angel Gardens in Manchester, whose future is currently up in the air.

It all means, as ever in such sad circumstances, the only winners will be the lawyers.

Some knowledgeable voices are saying the good times are now over for the housebuilding sector.

James ParkerEditor of Housebuilder & Developer

Very specific circumstances

Drawing some form of line to other major contractors as a cause for more doom-saying may be misleading.

Carillion’s demise was a very specific set of circumstances, not least around a couple of major unpaid debts from Middle East contracts, reportedly including £200m for work on the 2022 Qatar World Cup.

Notwithstanding this however, the bid-low, reap a tiny margin culture is endemic across construction, and other firms are certainly vulnerable if this turns out to be Carillion’s fatal flaw.

PFI bites back

Another sorry aspect tale that will eventually be picked over by the National Audit Office (probably when most of the Ministers have moved on) is that many in Government saw this coming, yet contracts continued to be awarded for major projects such as HS2.

This would seem to be complacency bordering on the criminally negligent, given the resulting financial fallout, including the inflated prices the stand-in firms will be charging to mop up the work.

PFI was always a dubious business, the country paying colossally over the odds for hospitals and prisons (which admittedly wouldn’t otherwise have been built) to have the asset ‘free of charge’ to use.

But in the case of Carillion, allowing companies to play the field virtually unfettered has come back to bite the Government on the bum, to put it bluntly.

Housebuilding

In the meantime, housebuilders are now expected to deliver the ‘magic number’ of 300,000 homes a year.

While Carillion may not be a major player in the sector, it has countless subcontractors and construction partners who are, housebuilder Galliford Try being one to have confirmed it’s out of pocket.

Firms in the supply chain going out of business is never a good thing, particularly when UK economic performance is moderate at best, and OECD predictions for GDP growth only 1 per cent for 2018.

The £44bn housing plan from Government announced last year was impressive, but what matters is also action, and they started the year with an unconvincing Cabinet reshuffle in which we welcomed Dominic Raab as the 15th Housing Minister in 17 years.

With some very turbulent times ahead as we navigate Brexit and the wake of Carillion’s liquidation, some continuity at the top would be highly welcome to help kickstart the array of housebuilding schemes we need.

Are the good times over?

Some knowledgeable voices are saying the good times (which until recently have persisted in housebuilding despite infrastructure and commercial dropping off their perch) are now over for the sector.

Its generally agreed by commentators that house price growth will slow throughout 2018, but where’s the incentive to build if it plateaus completely?

This will take concerted intervention from Government, but are they (perhaps in the form of the beefed up HCA, Homes England) ready to do this with taxpayers’ money, either on Help to Buy or something more ‘supply’ orientated?

Apparently they have enough in the coffers to shore up Carillion’s many thousands of public sector workers, so lets see what they have for housebuilding.